Big Inflation Will Spur Gold Price / Commodities / Gold and Silver 2022

Gold investment demandshould be soaring with serious inflation raging, catapulting gold wayhigher.  Yet recently it has greatlylagged fast-rising general price levels, confounding contrarian investors.  But history argues this anomaly won’t last,that eventually big inflation will spur gold. Today’s terrible inflation super-spike fueled by extreme Fed moneyprinting is the first since the 1970s, when gold rocketed up by multiples.

The most-widely-followedUS inflation gauge is the Consumer Price Index. While its components and calculation methodologies have been changedcountless times, the CPI’s history extends back well over a century to 1913!  For an entire decade prior to April 2021, themonthly headline CPI averaged modest 1.7% year-over-year gains.  That long span didn’t see a single 4%+ print,even with pandemic-lockdown disruptions.

But something changedin April 2021, when the CPI suddenly accelerated up 4.2% YoY.  That proved its hottest read since September2008, emerging from that year’s brutal stock panic.  The Fed itself blamed that mounting inflationon supply-chain disruptions.  The FederalOpen Market Committee’s monetary-policy statement released late that month argued“Inflation has risen, largely reflecting transitory factors.”

That “transitory” dismissalof fast-rising general prices was last year’s buzzword.  It was an oft-repeated mantra of top Fedofficials, high government officials, and Wall Street economists whenever inflationwas discussed.  But they were all dead-wrong,as CPI inflation kept relentlessly rising. Answering a question at a Senate hearing in November, the Fed chair himselfadmitted “It is probably a good time to retire that word.”

In the 13 reported CPI monthssince April 2021, headline inflation has averaged huge 6.4%-YoY gains!  That proved one hell of an inflection, nearlyquadrupling the prior 120 months’ mean. Reaching inflation-super-spike status, the CPI’s recent high-water markso far is March 2022’s shocking 8.5%-YoY surge! That proved the hottest CPI read since all the way back in December1981, a dreadful 40.3-year high!

Yet the same people whoclaimed this raging inflation was transitory for most of last year now dismissit as supply-chain-driven.  But during thelast three quarters of 2020 when pandemic lockdowns and their severe economic disruptionspeaked, the CPI averaged just 0.9%-YoY gains. Remember the widespread shortages and empty shelves then?  Even massive government-stimulus-gooseddemand didn’t stoke inflation.

While artificially-elevateddemand and constrained supplies can certainly force up specific prices, thosespikes are temporary.  Lumber prices skyrocketedabout 6.4x from April 2020 to May 2021 on these very factors.  Yet once those passed, lumber cratered bynearly 3/4ths and remains back down near relatively-low July-2020 levels.  Blaming inflation on supply chains is ared herring to mask the Fed’s culpability in this!

Legendary Americaneconomist Milton Friedman summed up inflation perfectly in his famous 1963quote.  He warned “Inflation is alwaysand everywhere a monetary phenomenon.”  Generalprice inflation solely results from central banks ramping fiat-moneysupplies much faster than their underlying economies.  Far more dollars chase and compete formuch-slower growing goods and services, inexorably bidding up their prices.

The Fed itself spawned today’s inflation super-spike withextreme money printing.  Fed officialspanicked during March 2020’s brutal pandemic-lockdown stock panic, when the S&P500 plummeted 33.9% in just over a month! They feared a negative-wealth-effect-induced depression, so they rushedto flood the US economy with an epic deluge of new dollars conjured out of thinair at a radically-unprecedented scale.

Between late February2020 and mid-April 2022, the Fed expanded its balance sheet a ludicrous 115.6%or $4,807b in just 25.5 months!  Sincethat is effectively the monetary base underlying the entire US-dollar supply,redlining those monetary printing presses more than doubled it in just acouple years!  Suddenly vastly moredollars were injected into the system, cheapening their value relative to goodsand services.

The Fed’s extreme monetaryexcess directly spawned and fueled today’s inflation super-spike.  So it will continue raging until the majorityof those colossal QE4 monetary injections are drained back out via QT2 bondselling.  That is just starting here inJune, at $47.5b per month for a quarter before doubling to its terminalvelocity of $95b monthly in September.  Evenat that pace a mere half-unwind would take 25 months!

That’s a long time forraging inflation to fester, and gold’s investment demand and prices to soar to reflectthe Fed’s horrific currency debasement. And QT2 actually running to completion is doubtful.  The Fed prematurely caved on QT1 after it nearly hammered the US stock markets into a new bear in December 2018.  QT1 only unwound 22.8% of QE1, QE2, and QE3,so at least half-reversing QE4 would be a tall order.

The deeper the S&P500 is forced into serious bear territory by QT2 and the Fed’s aggressiverate-hike cycle, the greater the odds Fed officials will once again fold wayearly.  A major stock bear would triggera severe recession if not a depression, leaving the Fed universally villainizedas its cause.  The resulting intensepolitical pressure would threaten the Fed’s precious independence, forcing itsofficials to capitulate.

So the great majorityof the epic $5,016b of total QE4 money-supply growth is likely to stay, continuingto bid general price levels higher in coming years.  The longer high inflation vexes investors,the more they will flock back to gold.  Unlikefiat money, global gold-supply growth is hard-limited by mining constraints.  Regardless of prevailing gold prices, itusually takes well over a decade to develop gold deposits into mines.

So the globalabove-ground gold supply only grows on the order of 1% annually, which is dwarfedby money-supply growth rates orders of magnitude larger.  That leaves relatively-far-more moneyavailable to bid up the prices on relatively-much-less gold.  So the Fed effectively more than doubling theUS-dollar supply in just a couple years is exceedingly-bullish for gold, whichwill eventually reflect that monetary excess.

But since thatinevitable higher-gold-price adjustment hasn’t arrived yet, the yellow metalremains a heck of a buying opportunity for contrarian investors.  Gold is really lagging this firstinflation super-spike since the 1970s, as evident in this chart.  It overlays real inflation-adjusted goldprices on annual CPI changes over the past five years or so.  Gold has yet to meaningfully respond to this Fed-unleashedinflationary monster.

Ridiculously gold hasmostly ground sideways on balance during this latest inflation super-spike.  While April 2021 was that initial 4%+ CPIprint, technically inflation started marching higher well earlier after asuper-low +0.1%-YoY headline read in May 2020. During those initial pandemic lockdowns, general price levels flatlined onweak demand despite serious supply-chain snarls.  So that’s the trough of this inflation cycle.

In the 23 months sincethen, the CPI has soared 70.0x higher to April 2022’s +8.3%-YoY read!  While I’m penning this essay the day before thehyper-anticipated May CPI report, it will be published by the time you readthis.  Again this massive inflationsuper-spike is unlike anything witnessed since the 1970s, with that+8.5%-YoY March-2022 peak being the hottest CPI print since December 1981 fully40.3 years earlier!

Yet in monthly-average-gold-priceterms from that CPI trough month to the latest-CPI-report month, goldmerely managed a little 12.6% gain.  That’spathetic given this crazy monetary backdrop, crushing investors’ confidence ingold’s historical inflation-hedge status. Gold investment demand is heavily momentum-driven, and the yellow metal hassorely lacked upside kinetic energy for much of the last couple years.

That’s partially becausegold skyrocketed to extremely-overboughtlevels into August 2020 following that pandemic-lockdown stock panic.  Gold soared 40.0% higher in nominal terms to$2,062 in a blistering 4.6 months!  Colossal investment demand to chase those big gains stretched gold way up to 1.260x its 200-day movingaverage.  That record gold high renderedin today’s dollars inflated by the April-2022 CPI is $2,293.

That powerful uplegextended gold’s secular bull to 96.2% nominal gains over 4.6 years.  But bulls are an alternating series of majoruplegs followed by major corrections, taking two steps forward before sliding onestep back.  With speculators’ and investors’buying exhausted by that lofty near-parabolic peak, gold had to correct to rebalance sentiment.  That left golddeeply-out-of-favor with investors as inflation started surging.

Yet bull-marketsentiment acts like a giant pendulum, perpetually swinging back and forth fromgreed and fear extremes.  Sooner or latersome catalytic news will ignite big gold-futures buying,quickly forcing gold prices sharply higher. That will put the yellow metal back on investors’ radars, who will startreturning to chase those gains accelerating them.  Then higher prices will fuel growing demandin a strong virtuous circle.

This dire general-pricebackdrop of the first inflation super-spike since the 1970s will superchargegold investment demand.  The longerthe Fed tarries in draining the majority of that vast QE4 money spewed, thelonger high inflation levels will fester. Investors will increasingly flock back to gold as they worry about inflationcrushing corporate profits and bludgeoning stock markets lower.  That will become self-feeding.

While price targetsaren’t important, gold ought to at least double before this latestinflation super-spike gives up its ghost! Gold averaged $1,719 at that May-2020 CPI trough, so a doubling would ultimatelycarry it near $3,450.  Such heights wouldprobably prove fleeting, climaxing another parabolic spike on big upsidemomentum fueling extreme greed.  Thatsucks in all available buyers exhausting their capital firepower.

An inflation super-spikedoubling gold sounds like a stretch with its monthly-average prices only clockingin an eighth of those gains so far.  Butthe stunning examples of gold’s outperformances during the previous coupleinflation super-spikes in the 1970s reveals that is conservative.  This next chart superimposes April-2022-CPI-inflatedreal gold prices over the headline CPI’s year-over-year changes during thatdecade.

Once investors reallystart fearing serious inflation and doubting the Fed’s resolve to sufficiently combatit, gold investment demand soars.  The 1970s’first inflation super-spike was born at a June-1972 CPI trough up 2.7%YoY.  Over the next 30 months intoDecember 1974, that leading headline inflation gauge kept marching higher onbalance to a +12.3%-YoY peak. Monthly-average gold prices soared 196.6% in that span!

You read that right, goldnearly tripled in that first inflation super-spike after the US dollar wassevered from the gold standard in August 1971. That was partially because fast-rising general prices slammed theS&P 500 down 37.9% in monthly-average terms during that span!  With raging inflation forcing corporateearnings and stock prices lower, investors flocked to gold fueling momentum-drivenself-feeding buying.

Gold proved highly-correlatedwith headline CPI inflation trends during that decade, falling between its pairof inflation super-spikes.  The second oneproved much bigger, igniting at a +4.9%-YoY CPI in November 1976 then running 40months to a soul-crushing +14.8% YoY in March 1980.  Those nominal monthly-average gold pricesskyrocketed a colossal 322.4% during that span, literally more than quadruplingin it!

So gold doubling inthis current inflation super-spike seems conservative compared to historical precedent.  Again today’s high inflation is likely tofester as long as the majority of the Fed’s insane QE4 monetary injection remainsin the system.  Even if the FOMC canstomach QT2’s resulting serious stock bear and severe recession, it will take acouple years at full-speed to just unwind half of that $5,016b new dollarsupply.

That’s a long time for highinflation to ravage corporate profits and crush stock prices lower, motivatinginvestors to prudently diversify their stock-heavy portfolios with counter-movinggold.  And even if today’s CPI hasalready seen its year-over-year peak at March 2022’s +8.5%, that doesn’t affectgold’s bullish outlook.  This current CPIiteration is heavily-manipulated and lowballed compared to the 1970s version.

Real-world inflation isalready surging much-hotter than this politically-charged headline CPIindicates, as all Americans running businesses and households know.  Contrarian economists who have studied howthe CPI is computed over decades have estimated today’s inflation under the1970s methodology would be about double current headline-CPI levels.  Your own experiences with rising prices probablycorroborate that.

My own family has hadno major life changes over this past year. We live in the same house, eat mostly the same foods, do similar amountsof driving, and enjoy the same lifestyle we have for years.  Yet my wife and I estimate our living expenses are about 25% higher this year than last!  I hear similar accounts from friends and newslettersubscribers.  We all wish general prices wereonly up 8%ish YoY, reality is far worse.

The government chronicallyunderreports real-world inflation for political reasons.  Higher inflation angers voters, endangeringruling-party incumbent politicians as evident in their plunging approvalratings.  It also forces interest rateshigher, burdening the heavily-indebted US government with soaring interestpayments.  Resulting ballooning deficitsworsen more on bigger entitlement payments after cost-of-living adjustments.

But trying to downplayreported inflation doesn’t change the reality Americans face.  A third of the CPI is devoted to shelter expenses,owning houses and renting.  The Bureau ofLabor Statistics responsible for the CPI uses a fiction called owners’ equivalentrent to underreport shelter expenses. That is a fanciful survey asking homeowners to guess how much they’dexpect to pay in rent for a house of similar quality.

The latest April 2022CPI reported shelter costs only rose 5.1% YoY. Yet various real market measures and indexes of nationwide house prices andrent are showing increases ranging from 12% to 20%+.  If shelter costs alone were reported honestlyin today’s CPI closer to up 16% YoY, its headline read would surge over 12%!  That’s already near lofty mid-1970s levels,and there is plenty other lowballing illusionism.

So there’s no doubttoday’s inflation super-spike is already comparable to if not exceeding those 1970s ones!  Eventually gold priceshave to respond to vastly more US dollars in existence now thanks to the Fed’sextreme money printing.  Following theFed’s earlier QE1, QE2, and QE3 campaigns, prevailing gold prices permanentlyadjusted much higher to reflect far more money sloshing around in the system.

The full QE4 campaign provedway bigger and faster, totaling $5,016b over 2.5 years compared to thoseearlier campaigns’ collective $3,625b total over 6.7 years.  Again QT1 only unwound less than a quarter of that QE1, QE2, and QE3 money printing. There’s little reason to expect QT2 to prove more successful, as it willslaughter these QE4-levitatedbubble-valued US stock markets fomenting a severe recession.

The deeper aggressiveFed tightening crushes the US stock markets into bear territory, the more gold investmentdemand will mount.  The higher that drivesgold prices, the more investors will rush back to chase the yellow metal’supside momentum.  So seeing gold pricesdouble during this first inflation super-spike since the 1970s doesn’t seemlike much of a stretch.  That willeventually spur big gold investment demand.

The Fed’s thirteenthrate-hike cycle of this modern monetary era since 1971 accompanying QT2 isn’t athreat to gold either.  During the exactspans of all dozen previous Fed-rate-hike cycles, gold averaged impressive29.2% gains!  My years-old gold-thrives-in-Fed-rate-hike-cycles research thread is getting increasingly noticed.  Earlier this week I did a half-hour video interview on that topic with Palisades Gold Radio.

With this secular gold bulldestined to power much higher in today’s Fed-money-printing-driven inflationsuper-spike, gold stocks will be huge beneficiaries.  The fundamentally-superior mid-tier and junior gold miners will amplify gold’s upside to massive outsized gains.  Able to grow their outputs on balance while mostlyholding the line on costs, their earnings will soar.  So the out-of-favor gold stocks arescreaming buys.

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The bottom line is today’sbig inflation will spur gold investment demand, driving gold prices muchhigher.  This first inflation super-spikesince the 1970s is fueled by the Fed’s extreme QE4 money printing.  That effectively more than doubled the US-dollarsupply in just a couple years, forcing general price levels way higher!  While QT2 is getting underway, even at full-speedjust half-unwinding QE4 will take over two years.

And all that monetarydestruction will hammer stock markets into a major bear and force the economyinto a severe recession, so the Fed will likely capitulate early again.  Either way, high inflation will persist for along time with most QE4 money remaining in the system.  After nearly tripling then more thanquadrupling during the last inflation super-spikes in the 1970s, prevailinggold prices should at least double this time around.

Adam Hamilton, CPA

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